Education

Unwarranted pessimism over power sector

N. MUTHURAMAN | Updated on October 30, 2011 Published on October 30, 2011

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The recent spate of bad news regarding the power sector has generated pessimism among corporates and investors, who have a significant stake in the growth of this sector. However, many of these issues are temporary in nature, and are unlikely to dent the long-term prospects of this sector, which forms the backbone of the entire India growth story.

The sector has considerably matured in the last decade, with significant private sector participation across the entire value chain, and several structural reforms that have made the sector reasonably robust. While there is a pressing need for the next generation of reforms to help attract investments, the current issues facing the sector are quite manageable.

Let us take a closer look at some of the key issues facing the sector.

Coal supply: Short supply of coal due to workers' strike and the Telangana issue is essentially short-term in nature. The other negative development is Indonesia's proposed selective ban on export of coal from 2014. This could affect some of the upcoming plants, forcing them to look for alternative sources. However, previously-signed long-term contracts are unlikely to be reneged.

Weak Discoms: The financial health of electricity distribution companies (discoms) across various states have weakened significantly during the years. The age-old problems, such as unwillingness of the state governments to revise power tariffs periodically, and high distribution losses due to rampant power theft, have left a gaping hole in the finances of these discoms. This gap has been regularly filled with debt, leading to the current debt-trap situation.

The sector has, however, matured enough to isolate these problems, and ring-fence it at the SEB/State Govt level, without letting it spill onto the corporates, that are dependent on the power sector – independent power producers, EPC contractors, power equipment manufacturers, etc. Also, the problem hasn't yet assumed alarming proportions as it did in 2003.India's proven coal reserves that can last more than a 100 years (at the current consumption rates) and a strong banking sector that is geared to meet the funding needs — have all resulted in a formidable growth opportunity for the sector in the long term

Reform of the state-owned undertakings and periodic revision of tariffs to reflect economic cost of generation can take this sector to even greater heights.

(The author is ex-Director Ratings, CRISIL and Co-founder, RiverBridge Investment Advisors.)

>http://ChaseCut.blogspot.com

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Published on October 30, 2011
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